If you sell the house to the LLC, you will have to determine a price for the sale. That price plus any closing costs will be the amount you depreciate. Your accountant should be able to help you determine a price.

I would like to get an advice on somethig that we plan to do. We own a house that was purchased 10 years ago for $26K.This house used to be a our homestead but now we are turning it into a rental. We also would like to refinance/cash out the equity (the house is now worth ~80K with 20k loan balance remaining).

Since we had this house as a homestead we did not take the depreciation for the previous 10 years. Now when it becomes a rental property we will start taking the depreciation. Our basis will be the orignal purchase price of 26K, correct? As far as I understand if we just re-finance the house up to 80% of its real value, get $44 cash ($80000*80%-$20000=44000) since the house remains in our names, the basis for depreciation should still remain the same ($26K) correct?

Our plan is to form an LLC, obtain a loan and actually sell the house to the LLC. Since we have had the house for the last 2 years as a homestead we will pay no capital gain tax and we still get the same $44k.
My question is, will this help us to raise the depreciation basis for the house to the amount we sell it to the LLC?